2007: Should governments interfere in insurance markets like they are doing after Katrina?

AUDIENCE MEMBER: John Goss (PH), Key West, Florida.

Katrina created litigation that resulted in some rulings that combined flood damage and wind damage where the insurance companies thought they covered wind only.

As a result, some insurance companies are significantly reducing coverage in those states.

Florida recently empowered their insurance company called Citizens to be more aggressive not only with wind storms, but also with homeowners, while at the same time not allowing requested rate increases of other insurance companies.

The result is that some solid insurance companies have announced reducing their coverage or pulling out of Florida.

Is this type of government interference a random fluctuation in insurance or a major cause of concern for the future?

WARREN BUFFETT: Well, that’s an easy one to understand both sides of the question on.

I mean, the average homeowner is not going to sit there and read line-by-line what is in his insurance policy, and a lot of times the agent is not going to explain it carefully to them.

So when something comes along and he thinks it’s insured and it turns out that he bought a policy where it wasn’t insured, he’s going to feel very unhappy about it.

And when tens of thousands of people feel unhappy about it, you’re very likely to get some kind of governmental interference, and probably an inflation by judicial degree or by threats of the government to, in effect, extend the terms of the policy beyond what the insurance company thought it was insuring.

Now, an insurance company that’s had that kind of experience is going to be very reluctant to write insurance policies in the future, if they don’t think that the words will be adhered to.

And, on the other hand, I can fully understand some guy who’s had his house blown away in a storm and a lot of it was water damage and a lot of it was wind damage, thinking that, you know, he’s been wiped out and the insurance company comes around waving a policy that’s got a lot of small print in it, you know, he’s going to be unhappy.

So it’s a real tussle on that. And, you know, I guess I would — if I were writing policies, I would put the exclusions in very big type and very easy to understand.

But I still would expect that if thousands of people suffered losses, that courts and legislators would probably seek to stretch the terms, or even abrogate the terms of the contract, in order to take care of their own constituents and figure that guys like me or institutional investors who own insurance companies can afford it better than the homeowner.

When you get into the question of whether you should, in effect, have all of the people in the country pay premiums for, we’ll say, hurricanes, in a way, subsidize it through policies in Nebraska or Minnesota or someplace, for hurricanes in Florida, that gets very tough.

I mean, it can be very expensive to insure against hurricanes if hurricanes become more frequent and more intense. In fact, it can become so expensive that people really will not want to bear the cost of insurance, and they’ll want to socialize it some way.

And, of course, the guy in Nebraska says, “Look it. You went down there to live on the ocean and you thought it was wonderful, and we’re back here with these terrible winters, but why should we pay a portion of your insurance?”

So you’re going to have that tussle go on, and you’ll really have that tussle go on if you get a hundred billion dollar or $150 billion insured loss in Florida.

Because that will mean a huge change in taxation if the State of Florida steps in to compensate people. There will be calls for Washington to pay for it.

But, you know, it’s how much people who are not exposed to a risk should pay for the people who have elected to be exposed to the risk is — you know, it becomes a political question.

And my guess is that sometime in the next five or 10 years, you’ll see a struggle on that subject that exceeds — far exceeds — what we saw on Katrina. Charlie?

CHARLIE MUNGER: I’ve got nothing to add.